ARC Global Investments II, LC v. Digital World Acquisition Corp. ( 2024 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ARC GLOBAL INVESTMENTS II, )
LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2024-0186-LWW
)
DIGITAL WORLD ACQUISITION )
CORP., ERIC S. SWIDER, FRANK J. )
ANDREWS, EDWARD J. PREBLE, )
AND JEFFREY A. SMITH )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: July 29, 2024
Date Decided: September 16, 2024
Matthew D. Perri, Daniel E. Kaprow, Elizabeth J. Freud, Alfred P. Dillione & Rae
Ra, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for
Plaintiff ARC Global Investments II, LLC
Kevin M. Coen & Jacob M. Perrone, MORRIS, NICHOLS, ARSHT & TUNNELL
LLP, Wilmington, Delaware; Bradley J. Bondi, D. Scott Carlton, Traci Zeller &
Nicholas J. Griepsma, PAUL HASTINGS LLP, Washington, D.C.; Counsel for
Defendants Digital World Acquisition Corp., Eric S. Swider, Frank J. Andrews,
Edward J. Preble, and Jeffrey A. Smith
WILL, Vice Chancellor
ARC Global Investments II, LLC was the sponsor of Digital World
Acquisition Company (DWAC), a special purpose acquisition company. Early on,
ARC purchased founder shares of DWAC Class B common stock that would
represent 20% of DWAC’s outstanding shares after its initial public offering. Units
purchased in DWAC’s initial public offering and through private placement included
one share of Class A common stock per unit and one half of a warrant.
DWAC’s certificate of incorporation provided that at the closing of a business
combination, shares of Class B common stock would automatically convert into
shares of Class A common stock at a minimum ratio of 1:1. This would allow the
Class B stockholders to retain their approximate 20% stake, excluding shares issued
to any seller in the business combination. The certificate of incorporation also
provided that if shares of Class A stock were issued or deemed issued in excess of
the amount sold in the IPO, a different conversion ratio formula would apply. This
formula acted as an anti-dilution provision in favor of Class B stockholders. With
certain exclusions, Class B stockholders were essentially provided with one Class A
share for every four Class A shares otherwise issued or issuable.
There is no dispute that the conversion ratio formula was triggered since
DWAC issued additional Class A shares post-IPO. The parties agree that the
denominator of the ratio reflects the number of Class B common shares outstanding
at the time of DWAC’s business combination with Trump Media & Technology
1
Group Corp. They disagree on whether DWAC properly calculated the numerator
to the conversion ratio, which is more complicated. DWAC maintains that the
proper ratio is 1.3481:1. ARC insists that it should be 1.8178:1.
In the decision that follows, I interpret DWAC’s certificate of incorporation
to determine the correct conversion ratio. I consider the parties’ disagreements on
Class A common shares that were issued or issuable in connection with several
categories of securities. I agree with ARC on some inputs, with the defendants on
others, and set the conversion ratio at 1.4911:1.
What should have been a straightforward exercise in contract interpretation
and math was obscured by the parties’ injection of other issues. ARC claims that
the members of DWAC’s board of directors calculated the conversion ratio and
made related disclosures in bad faith out of personal animus for ARC’s founder
Patrick Orlando. In response, the defendants raise a series of affirmative defenses
concerning unrelated and purported misconduct by Orlando. I reject these diversions
as meritless, irrelevant, or untimely.
ARC has prevailed on aspects of its breach of contract claim. It is entitled to
an order of specific performance and related declaratory relief. It did not, however,
prove its breach of fiduciary duty claims. Judgment is entered for ARC in part and
for the defendants in part.
2
I. BACKGROUND
The facts described below were proven by a preponderance of the evidence at
trial or stipulated to by the parties.1
A. Digital World Acquisition Company and its Sponsor
Defendant Digital World Acquisition Corp. was formed as a Delaware
corporation on December 11, 2020.2 As a SPAC, DWAC’s ultimate purpose was to
effect a business combination.3
Plaintiff ARC Global Investments II, LLC, a Delaware limited liability
company, was DWAC’s sponsor.4 In early 2021, ARC purchased founder shares of
DWAC Class B Common Stock.5 These founder shares were to represent 20% of
the total shares outstanding after DWAC completed its initial public offering.6
1
See Stipulation and Second Am. Pre-trial Order (Dkt. 182) (“PTO”). Exhibits jointly
submitted by the parties at trial are cited according to the numbers provided on the parties’
joint exhibit list as “JX __,” unless otherwise defined. Unless otherwise noted, pin cites
are to the pagination stamped in labeling joint exhibits. Deposition transcripts are cited as
“[Last Name] Dep. __.”
2
PTO ¶ 13.
3
PTO ¶ 6; see JX 2 at 3; Swider Dep. 9.
4
PTO ¶ 5.
5
Id. After a stock split and return of shares to DWAC, these amounted to 5,490,000 shares
at the time of the business combination discussed below. Id.
6
JX 2 at 21.
3
Patrick Orlando purports to be ARC’s managing member.7 He also claims to
be its controlling member.8 He previously served as a director and the Chairman
and Chief Executive Officer of DWAC.9
B. The Initial Public Offering
In preparation for its initial public offering, DWAC filed an amended and
restated certificate of incorporation (the “Charter”) with the Delaware Secretary of
State.10 The Charter authorized 210,000,000 shares of Common Stock, consisting
of 200,000,000 shares of Class A Common Stock and 10,000,000 shares of Class B
Common Stock.11
DWAC’s initial public offering occurred in September 2021. DWAC sold
25,000,000 units at $10 per unit. Another 3,750,000 units were sold for $10 per unit
in a secondary public offering.12 Each IPO unit consisted of one share of DWAC
Class A Common Stock and one half of a redeemable warrant.13 Each whole warrant
7
PTO ¶ 47; see Leon v. Orlando, C.A. No. 2024-0311-LWW (Del. Ch.).
8
PTO ¶ 12.
9
Id.
10
JX 40 (“Charter”).
11
PTO ¶ 16; Charter § 4.3.
12
PTO ¶ 18; JX 201.
13
PTO ¶ 15.
4
provided holder with the right to purchase an additional share of Class A Common
Stock.14
DWAC also issued 1,133,484 private placement units to ARC.15 Each private
placement unit consisted of one share of Class A Common Stock and one half of one
warrant.16
C. The Conversion Ratio
The Charter explains that upon the closing of a business combination, shares
of Class B Common Stock would automatically convert into shares of Class A
Common Stock.17 Section 4.3(b) of the Charter sets the ratio at which Class B
Common Stock would be converted into Class A Common Stock at a minimum of
“a one-for-one basis.”18 If “additional shares of Class A Common Stock, or Equity-
linked Securities . . . [we]re issued or deemed issued in excess of the amounts sold
in [DWAC]’s initial public offering of securities,” a different conversion ratio in
Section 4.3(b)(ii) of the Charter (the “Conversion Ratio”) was triggered.19
14
Id.
15
JX 200 (“Proxy Statement”) at 4. All citations to the Proxy Statement follow its internal
pagination rather than the joint exhibit pagination.
16
Id.
17
PTO ¶ 16; Charter § 4.3.
18
Charter § 4.3(b)(i).
19
Id. § 4.3(b)(ii); see infra note 93 and accompanying text (discussing the definition of
“Equity-linked Securities”).
5
The denominator for the Conversion Ratio is static. It is the “number of shares
of Class B Common Stock issued and outstanding prior to the closing of the initial
Business Combination.”20 The relevant figure is 7,158,025.21
The numerator is more complicated. Section 4.3(b)(ii) of the Charter outlines
a mathematical formula to calculate it. The formula proceeds in several steps.
First, the formula considers the “shares of Class A Common Stock issued or
issuable” by DWAC “upon the conversion or exercise of any Equity-linked
Securities or otherwise . . . related to or in connection with the consummation of” a
business combination.22 Second, “securities issued or issuable to any seller” in the
business combination are excluded from the numerator, as are “any private
placement units (or underlying securities) issued to ARC.”23 Third, 25% of these
“issued or issuable” shares Class A Common Stock (less exclusions) are added to
“number of shares of Class B Common Stock issued and outstanding” before the
business combination.24
Specifically, Section 4.3(b)(ii) of the Charter states:
20
Charter § 4.3(b)(ii).
21
This number is not in dispute. See Pl.’s Corrected Opening Pre-trial Br. (Dkt. 72) (“Pl.’s
Opening Br.”) 33; Defs.’ Pre-trial Answering Br. (Dkt. 143) (“Defs.’ Answering Br.”)
Br. 26 n.29.
22
Charter § 4.3(b)(ii).
23
Id.
24
Id.
6
(A) 25% of all shares of Class A Common Stock issued or issuable
(upon the conversion or exercise of any Equity-linked Securities or
otherwise) in each case by the Corporation related to or in connection
with the consummation of the initial Business Combination (excluding
any securities issued or issuable to any seller in the initial Business
Combination and any private placement units (or underlying securities)
issued to ARC Global Investments II LLC (the “Sponsor”) or its
affiliates upon conversion of loans made to the Corporation) plus (B)
the number of shares of Class B Common Stock issued and outstanding
prior to the closing of the initial Business Combination[.]25
D. The Business Combination
On October 20, 2021, DWAC entered into a Merger Agreement with Trump
Media & Technology Group Corp. (“TMTG”).26 Under the Merger Agreement,
TMTG stockholders would receive shares in DWAC equal to $875,000,000, subject
to adjustments and the right to receive earnout shares after the closing.27 A May
2022 amendment to the Merger Agreement provided that holders of promissory
notes issued by TMTG (the “TMTG Convertible Notes”) would receive DWAC
stock directly from DWAC.28
25
Id.
26
PTO ¶ 19; JX 9. DWAC changed its name to Trump Media & Technology Group Corp.
after the business combination closed. To avoid confusion, this opinion refers to the pre-
closing and post-closing publicly traded entity as “DWAC” and its pre-closing privately
held counterparty, which is now a wholly owned subsidiary of DWAC, as “TMTG.”
27
JX 9 § 1.9(f); see id. § 7.3(d)(ix).
28
JX 12 § 1.9(g). The Merger Agreement defined the TMTG Convertible Notes as “(i)
TMTG Executive Promissory Notes entered into in the ordinary course of TMTG’s
business as compensation for certain of its directors and officers and (ii) series of
convertible promissory notes in the aggregate principal amount of up to $60,000,000 issued
by TMTG pursuant to those certain note purchase agreements[.]” Proxy Statement at 6.
7
The business combination encountered roadblocks to closing. Among them
was an investigation by the United States Securities and Exchange Commission
(SEC) into whether DWAC falsely represented that it lacked a potential merger
target when it had already identified TMTG.29 After the investigations began,
TMTG asserted its right to withdraw from the Merger Agreement pending
renegotiation.30 On July 20, 2023, the SEC approved a settlement in principle.31 In
connection with the investigation, DWAC terminated Orlando as DWAC’s
Chairman and CEO in March 2023.32
TMTG and DWAC resumed negotiations. On August 9, DWAC and TMTG
amended the Merger Agreement a second time.33 Orlando signed the amendment
on behalf of ARC.34 The second amended Merger Agreement explained that the
issued and outstanding TMTG Convertible Notes would “automatically convert
29
JX 317. The SEC found that this conduct violated Sections 10(b) and 17(a)(2) of the
Securities Act of 1933. Id. ¶¶ 46-47.
30
Proxy Statement at 192; see JX 36.
31
Proxy Statement at 63.
32
Id. at 73. At the time of his termination, Orlando had not been charged with or found
guilty of wrongdoing. On July 17, 2024, the SEC brought a separate complaint against
Orlando. JX 348.
33
JX 86.
34
Id. at 8.
8
immediately prior to” the effective time of the merger “into a number of shares of
[TMTG] Common Stock.”35
E. The Post-IPO Issuances
DWAC issued additional securities after its IPO. Several are relevant to this
dispute. Certain convertible notes were issued in exchange for services. Warrants
were also issued to resolve threatened litigation.
1. The Compensation Notes
In November 2023, the Compensation Committee of DWAC’s Board of
Directors proposed a plan to compensate the company’s officers and directors with
convertible notes (the “Compensation Notes”).36 Those paid for their services by
the Compensation Notes included defendants Eric Swider, Frank Andrews, Jeffrey
Smith, and Edward Preble (together, the “Director Defendants”).
Other than Swider, none of Director Defendants held interests in DWAC
Class B Common Shares.37 Through the Compensation Notes, Swider received
192,000 shares. Alexander Cano, DWAC’s Secretary and President, received
165,500 shares. Andrew, Smith, and Preble each received 97,500 shares.38 Renatus
Advisors, LLC, of which Swider is the sole member, also received a promissory note
35
Id. at 2.
36
JX 46; JX 77 at 3.
37
Proxy Statement at 308.
38
JX 46 at 2.
9
of 225,000 shares.39 The Compensation Notes were payable by DWAC on the date
it consummated the business combination.40
2. The Legal Services Note
DWAC also issued a note for $500,000 to pay an outside attorney who
provided legal services to the company (the “Legal Services Note”).41 The
attorney’s engagement letter said that he would provide “legal consultation to
DWAC on various legal matters,” including the pending federal investigations.42
The Legal Services Note was the sole compensation for this legal advice.43
3. The Alternative Warrants
In December 2023 and January 2024, investors who had agreed to participate
in DWAC’s failed private investment in public equity (PIPE) offering sought other
ways to provide financing to DWAC. DWAC entered into a new $50,000,000 PIPE
under the registration exemption in Section 4(a)(2) of the Securities Act of 1933.44
39
Swider Dep. 22, 159-60.
40
Proxy Statement at 22-23.
41
JX 50.
42
JX 45 § 1.
43
Id. § 3 (describing the payment terms).
44
Proxy Statement at 90 (“[O]n February 8, 2024, Digital World entered into a subscription
agreement with certain institutional investors for the issuance of the Digital World
Alternative Financing Notes, issuing $10,000,000 in Digital World Alternative Financing
Notes to such institutional investors. Digital World expects to issue the remaining up to
$40,000,000 of such Digital World Alternative Financing Notes concurrently with the
Closing.”).
10
For some of the original investors who did not participate in the new PIPE,
DWAC entered into warrant subscription agreements for the issuance of 3,050,000
warrants (the “Alternative Warrants”).45 The Alternative Warrants were issued in
settlement of threatened litigation over the terminated PIPE.46 The recipients of the
Alternative Warrants did not make any monetary investment in or cash payment to
DWAC in exchange.47
F. The Conversion Ratio Calculation
As the business combination with TMTG neared, DWAC began preparing its
proxy statement. One component of the filing was DWAC’s forecast of the
Conversion Ratio calculation. Orlando began to engage with ARC on the subject.
On February 4, 2024, Orlando told DWAC’s counsel that the Charter required
a Conversion Ratio of 1.58:1.48 His calculation included shares associated with the
Compensation Notes and the Alternative Warrants in the numerator but excluded
shares associated with the TMTG Convertible Notes and certain units issued to ARC
upon the conversion of loans from ARC to DWAC (the “ARC Notes”).49
45
Id. (“[O]n February 7, 2024, Digital World entered into warrant subscription agreements
with certain institutional investors for the issuance of the Digital World Alternative
Warrants in settlement of the terminated PIPE Investment . . . .”); JX 319.
46
Proxy Statement at 90; see also Swider Dep. 232-36.
47
See, e.g., JX 72; JX 73; JX 74; JX 75 (Alternative Warrant Agreements).
48
JX 321.
49
Id.; see JX 31.
11
On February 11, DWAC’s counsel sent Orlando a spreadsheet applying the
company’s calculation of the conversion ratio with corresponding explanations.50
The spreadsheet excluded Class A shares issued or issuable in relation to the
Compensation Notes, Legal Services Note, Alternative Warrants, TMTG
Convertible Notes, and the ARC Notes from the numerator of the Conversion
Ratio.51 It reflected a ratio of 1.34:1. Orlando responded that ARC’s “current
calculation of the [C]onversion [R]atio is 1:1.69.”52
G. The Proxy Statement and Closing
On February 16, 2024, DWAC filed a proxy statement/prospectus with the
SEC on Form 424(b)(4) (the “Proxy Statement”).53 The Proxy Statement alerted
DWAC stockholders that a special meeting would be held on March 22, 2024 to
approve the business combination with TMTG. The Proxy Statement also stated
that DWAC had incurred “significant unanticipated expenses well in excess of the
working capital loans provided by [ARC],” requiring the company to undertake post-
IPO financings to raise money.54
50
JX 57.
51
JX 325.
52
JX 323 at 1.
53
Proxy Statement at 160.
54
Id. at 96.
12
Proposal 9 of the Proxy describes Class A shares that would be issued or
issuable upon stockholder approval of the proposal and the business combination:55
• (i) up to 7,969,145 shares of New Digital World common stock
in connection with the conversion of any Digital World
Convertible Notes and Digital World Alternative Financing
Notes entered into prior to the consummation of the Business
Combination;
• (ii) up to 6,552,509 shares of New Digital World common stock
in connection with the exercise of Post-IPO Warrants; and
• (iii) up to 8,369,509 shares of New Digital World common
stock issuable upon conversion of outstanding TMTG
Convertible Notes immediately prior to the Effective Time in
connection with the Closing.56
The Proxy Statement explained that these issuances would “trigger the anti-dilution
provision contained in [the] Charter adjusting the [C]onversion [R]atio of [] Class B
common stock to Class A common stock.”57
The Proxy Statement also made disclosures about the Conversion Ratio. It
explained that DWAC “expect[ed] the [C]onversion [R]atio rate to be 1.34, . . .
exclud[ing] the expected issuance of the Digital World Alternative Warrants . . . and
the [Compensation Notes].”58 The Proxy Statement further stated that “when
55
Id. at 224.
56
Id.
57
Id. at 96.
58
Id.
13
calculating the definitive conversion ratio, the Board may also decide to exclude any
Post-IPO Financings . . . As a result, the Board may find a different, lower
conversion ratio to be acceptable at the time of the Closing.”59 It cautioned investors
against “relying on” the disclosed ratio “[s]ince the Board is obligated to calculate
the final conversion ratio upon the Closing” and there could be “no assurance that
the current conversion ratio will not materially differ at the time of the Closing.”60
It described the dispute with ARC over the Conversion Ratio:
[F]ollowing recent interactions with Mr. Orlando, it is understood that
Mr. Orlando’s position is that the conversion ratio should be 1.69.
However, Digital World has not been able to confirm the basis for
such a different conversion ratio. Should Mr. Orlando pursue these
claims related to the adjustment and prevail, applying a 1.69
conversion ratio would result in the issuance of 4,939,038 shares of
New Digital common stock compared to 2,433,729 shares of Class A
common stock. If the conversion ratio were 1.34, Public Stockholders
not redeeming their shares prior to the Closing are expected to bear
the burden of this additional dilution.61
After this litigation was filed and ARC challenged the disclosures in the Proxy
Statement, DWAC issued a March 1, 2024 Form 8-K disclosing a potential range
for the Conversion Ratio.62 It stated that the Board “may find a different, lower
conversion ratio to be acceptable at the Closing.”63 DWAC reiterated that “certain
59
Id. at 97.
60
Id.
61
Id.
62
JX 99.
63
Id. at 9.
14
holders of Class B common stock may disagree with the conversion ratio,
particularly if the Board determined that other Post-IPO Financings should also be
excluded resulting in a lower conversion ratio.”64
On March 25, 2024, DWAC Merger Sub Inc. merged with and into TMTG,
with TMTG surviving as a wholly owned subsidiary of DWAC.65 DWAC changed
its name to “Trump Media & Technology Group Corp.”66 TMTG’s Registration
Statement after the business combination stated that “[a]s a result of, and in
connection with the Closing,” the TMTG Convertible Notes converted into private
shares of TMTG.67 Specifically, the Registration Statement explained:
(i) immediately prior to the [Business Combination] the TMTG
Convertible Notes were converted into TMTG Common Stock and all
of the outstanding TMTG Common Stock that was issued upon such
conversion was automatically cancelled and ceased to exist . . . [and]
(iii) Public TMTG issued an aggregate of 95,354,534 shares of Public
TMTG Common Stock to TMTG securityholders as of immediately
prior to the Effective Time (which amount includes (x) 7,854,534
shares of Public TMTG Common Stock to the former holders of the
TMTG Convertible Notes).68
Under the second amended Merger Agreement, the private stockholders of TMTG,
including those who received their shares because of the conversion of the TMTG
64
Id.
65
JX 129 at 2.
66
Id.
67
JX 137 at F-28.
68
Id.
15
Convertible Notes, received shares in the post-de-SPAC entity in exchange for their
private TMTG shares.69
H. This Litigation
On February 29, 2024, ARC filed this action against DWAC and the Director
Defendants.70 It advanced claims for breach of the Charter, declaratory judgment,
and breach of fiduciary duty. ARC initially alleged that the proper Conversion Ratio
was 1.78:1.71
On March 5, I expedited the litigation so that ARC’s claims could be resolved
before the expiration of a contractual lock-up period on transferring the relevant
shares.72 I ordered DWAC to place into escrow “the number of shares of Class A
common stock shares reflecting the difference between the conversion ratio of
DWAC Class B common stock shares employed by DWAC at closing and a
conversion of DWAC Class B common stock shares at a ratio of 2:1.”73 The escrow
agent is to release the disputed shares sufficient to satisfy ARC’s conversion rights
69
JX 86; JX 137 at 2.
70
Dkt. 1.
71
Id. ¶ 35.
72
Dkt. 23.
73
Dkt. 28 ¶ 1. This order had the effect of allowing ARC to maintain standing in this action
after closing.
16
under the Charter within two business days of a direction from this court or a joint,
written direction from ARC and DWAC.74
On May 23, after fact discovery was complete, ARC sought leave to amend
its complaint.75 The defendants opposed this request. I denied ARC’s motion in
part but allowed ARC to make amendments reflecting theories on the conversion
ratio and personal animus against Orlando that were developed during discovery.76
I also permitted the defendants to take limited discovery into the newly pleaded
theories.
ARC filed its amended complaint on June 7.77 On June 12, the defendants
answered the amended complaint and raised seven affirmative defenses.78
The litigation proceeded to a one-day trial on a paper record on July 29. In
addition to the parties’ claims and defenses, several other motions were submitted
for resolution by the court. ARC moved to exclude an estoppel theory advanced by
the defendants, to strike the defendants’ new affirmative defenses, and to exclude
from evidence testimony regarding reliance on counsel and a late-produced
74
JX 124 at 16-17.
75
Dkt. 67.
76
Dkt. 126 at 44.
77
Dkt. 91.
78
Dkt. 108.
17
document.79 The defendants moved to exclude certain extrinsic evidence and for
partial judgment on the pleadings related to ARC’s breach of fiduciary duty claim.80
These matters were taken under advisement upon the conclusion of trial. I
committed to resolve then within 150 days of the closing of the business
combination, at which point the contractual lock-up period expires.81 That date is
September 19, 2024.
II. LEGAL ANALYSIS
ARC’s primary claim is that DWAC breached the Charter by miscalculating
the numerator to the Conversion Ratio. It also asserts that the Director Defendants
breached their fiduciary duties by making false and misleading disclosures in the
Proxy about the Conversion Ratio.
ARC has the burden to prove these claims by a preponderance of the
evidence.82 “Proof by a preponderance of the evidence means proof that something
is more likely than not.”83 ARC has met this burden for certain of its contentions
79
Dkts. 77, 136-37, 184.
80
Dkts. 151, 152.
81
Dkt 28.
82
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010).
83
inTEAM Assocs., LLC v. Heartland Payment Sys., Inc., 2016 WL 5660282, at *13 (Del.
Ch. Sept. 30, 2016), aff’d in part, rev’d in part on other grounds sub nom. Heartland
Payment Sys., LLC v. inTEAM Assocs., LLC, 171 A.3d 544 (Del. 2017).
18
that the defendants breached the Charter in setting the Conversion Ratio. It has
otherwise fallen short.
A. Breach of Contract
“Under Delaware law, the elements of a breach of contract claim are: 1) a
contractual obligation; 2) a breach of that obligation by the defendant; and 3) a
resulting damage to the plaintiff.”84 The Charter imposed a contractual duty on
DWAC regarding the Conversion Ratio.85 Resolving ARC’s claim turns on whether
DWAC improperly excluded certain securities from the Conversion Ratio
calculation in contravention of the Charter, causing damage to ARC.
The principles of contract interpretation that govern my review of the Charter
are well established. “Delaware law adheres to the objective theory of contracts,”
meaning that “a contract’s construction should be that which would be understood
by an objective, reasonable third party.”86 Absent ambiguity, the court “will give
priority to the parties’ intentions as reflected in the four corners of the agreement.”87
84
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003).
85
Charter § 4.3.
86
Salamone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (quoting Osborn ex rel. Osborn
v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)).
87
Id. at 368 (quoting GMG Cap. Invs., LLC, 36 A.3d 776, 779 (Del. 2012)); see also Eagle
Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997) (“Contract
terms themselves will be controlling when they establish the parties’ common meaning so
that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language.”).
19
A contract must “be construed in its entirety, and an attempt should be made to
reconcile all of [its] provisions in order to determine the meaning intended to be
given to any portion of it.”88 Additionally, the court “will give each provision and
term effect, so as not to render any part of the contract mere surplusage.”89
ARC reads Section 4.3(b)(ii) of the Charter as requiring a simple exercise in
division. The denominator is 7,158,025, which is the undisputed total amount of
outstanding Class B shares.90 The numerator is the Class B shares plus “25% of all
shares of Class A common Stock issued or issuable (upon the conversion or exercise
of any Equity-linked Securities or otherwise)” with two exceptions: (1) “any
securities issued or issuable to any seller in the initial Business Combination” and
(2) shares derived from “any private placement units (or underlying securities)”
issued to ARC “upon conversion of loans made to the [DWAC].”91
ARC contends that the defendants made several exclusions from the
numerator that are inconsistent with this formula. These exclusions concern three
categories of post-IPO securities: (1) the Compensation Notes, Alternative Warrants,
and Legal Services Note; (2) the TMTG Convertible Notes; and (3) the ARC Notes.
88
Warner Commc’ns Inc. v. Chris-Craft Indus., Inc., 583 A.2d 962, 967 (Del. Ch. 1989),
aff’d, 567 A.2d 419 (Del. 1989) (internal citation omitted).
89
Osborn, 991 at 1159 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 2010 WL
779992, at *2 (Del. Mar. 8, 2010)).
90
Charter § 4.3(b)(ii); JX 130 at 20; see supra note 21.
91
Charter § 4.3(b)(ii).
20
In addition, ARC argues that certain shares listed in the post-closing registration
statement were wrongfully omitted from the numerator.
1. Equity-linked Securities
Section 4.3(b)(ii) of the Charter states that the numerator of the Conversion
Ratio must include shares of “Class A Common Stock issued or issuable (upon the
conversion or exercise of any Equity-linked Securities or otherwise) . . . .”92 DWAC
excluded the shares issued in connection with the Compensation Notes, Legal
Services Note, and Alternative Warrants on the ground that they were not “Equity-
linked Securities.” The Charter defines “Equity-linked Securities” as “debt or equity
securities that are convertible, exercisable or exchangeable for shares of Class A
common stock issued in a financing transaction in connection with the initial
Business Combination.”93
Under ARC’s reading of the Charter, however, it does not matter whether
these are Equity-linked Securities because the only relevant question is whether
Class A shares are issued or issuable.94 To determine whether the Conversion Ratio
is triggered, the Charter requires a determination that “additional shares of Class A
Common Stock, or Equity-linked Securities . . . are issued or deemed issued in
92
Charter § 4.3(b)(ii) (emphasis added).
93
Id.
94
See Pl.’s Opening Br. 35-36.
21
excess of the amounts sold in [DWAC’s] initial public offering of securities.”95
Either (1) an issuance or deemed issuance of Class A Common Stock or (2) an
issuance or deemed issuance of an Equity-linked Security is sufficient. Once the
Conversion Ratio is triggered, the Charter requires that “25% of all shares of Class
A Common Stock issued or issuable” be included in the numerator.96
The Charter explains that this figure generally includes “all shares of Class A
Common stock” that are issued or issuable “upon the conversion or exercise of any
Equity-linked Securities or otherwise,” with two specific exclusions.97 ARC reads
the word “otherwise” in this provision broadly and consistent with its ordinary
meaning of “in a different way.”98 ARC argues that the text clarifies that other than
the two identified exclusions, all other issued or issuable Class A shares are included
in the figure regardless of whether they result from the conversion or exercise of
Equity-linked Securities.
DWAC reads the provision differently. It maintains that only shares issued
or issuable due to an Equity-linked Security should be included in the numerator,
95
Charter § 4.3(b)(ii). There is no dispute that the Conversion Ratio was triggered.
96
Id.
97
Id.; see infra Sections II.A.2-3 (discussing the exceptions).
98
Pl.’s Pre-trial Reply Br. (Dkt. 162) 11 (quoting Otherwise, Black’s Law Dictionary (12th
ed. 2024)).
22
based on a narrow reading of “otherwise.”99 In contrast to ARC’s reading, DWAC
avers that the phrase “accounts for the various manners in which Equity-linked
Securities could become Class A stock.”100
DWAC’s interpretation invokes the ejusdem generis canon of construction,
which instructs that a general word after a list of particulars is “controlled and
defined by reference” to the terms preceding it.101 It relies on Sullivan Money
Management, Inc. v. FLS Holdings Inc., where the Court of Chancery applied the
ejusdem generis canon in interpreting a charter provision requiring a class vote to
change the terms and provisions of preferred stock “by amendment to the Certificate
of Incorporation or otherwise.”102 The court construed the “otherwise” clause
narrowly because a broad reading would change the terms of the preferred stock by
giving preferred stockholders a class vote on a merger.103
99
Defs.’ Answering Br. 41.
100
Id. at 40-41.
101
Sw. Airlines Co. v. Saxon, 596 U.S. 450 (2022) (citation omitted).
102
1992 WL 345453, at *2 (Del. Ch. Nov. 20, 1992). DWAC cites to the United States
Supreme Court’s recent Fischer decision, which applied ejusdem generis in holding that a
residual “otherwise” clause in a criminal statute should be narrowly construed since it
followed a list of specific criminal violations. Defs.’ Answering Br. 43 (citing Fischer v.
United States, 603 U.S. --, 144 S. Ct. 2176 (2024)). This reading was supported by the fact
that the statute outlined “specific criminal acts and settings,” such that a broad reading of
“otherwise” would obviate the overall context of the statute in the criminal code. Fischer,
144 S. Ct. at 2178. No such considerations apply to the Charter.
103
Sullivan, 1992 WL 345453, at *2.
23
But Delaware courts neither reflexively apply canons of construction nor
“mechanically assign[] specific words their ordinary meaning.”104 The court must
instead construe the contract as a whole to interpret a term in context. “The object
of construction is to ascertain the true intent from the words used, not how
meaningless the words can be made by the application of any given rule.”105
Here, the point of Section 4.3 is to prevent dilution. For the Class B
stockholders to maintain 20% of the company’s common stock on an as-converted
basis, the Class B stockholders would be issued one share for every four shares
issuable—i.e., 25% of all issuable shares. Consistent with this purpose, Section
4.3(b)(ii) contemplates the inclusion of “25% of all shares of Class A Common
Stock [that are] issued or issuable.”106 ARC’s interpretation of “or otherwise” as
meaning that shares are included regardless of the form in which the right to that
share is created gives effect to this language and intent.107
DWAC’s interpretation, by contrast, would significantly curtail the anti-
dilution provision by limiting the numerator to 25% of shares issued or issuable
104
Id. at *4.
105
State ex rel. Waldman v. Miller-Wohl Co., 28 A.2d 148, 152 (Del. Super. 1942).
106
Charter § 4.3(b)(ii) (emphasis added).
107
See In re Staples, Inc. S’holders Litig., 792 A.2d 934, 961 n.52 (Del. Ch. 2001) (stating
that the “words ‘or otherwise’ in the certificate may be expansive enough to cover a reverse
split” effected by hundreds of individual contracts since the certificate included the
parenthetical “by reverse stock split, reclassification, or otherwise”).
24
through Equity-linked Securities. DWAC believes that the word “otherwise” should
be limited to the narrow definition of Equity-linked Securities.108 Yet the only
examples DWAC can conjure of what “otherwise” would mean are “a precursor to
an equity-linked security” and “something that [was] questionable [as to] whether it
constituted . . . a security.”109 That is, DWAC cannot give a concrete example of
what “otherwise” would capture if it only accounted for the ways in which Equity-
linked Securities became Class A stock. Its reading would make the phrase “or
otherwise” superfluous.110
Accordingly, the Conversion Ratio considers all issued or issuable shares of
Class A Common Stock, with two defined exceptions. I need not determine if the
Legal Services Notes, Alternative Warrants, and Compensation Notes fall within the
definition of Equity-linked Securities. The Class A shares issued or issuable from
the conversion or exercise of these securities must be included in the numerator of
the Conversion Ratio regardless.
2. TMTG Convertible Noteholders
One of the two categories of shares that Section 4.3(b)(ii) of the Charter
excludes from the Conversion Ratio is “securities issued or issuable to any seller in
108
Defs.’ Answering Br. 41.
109
Tr. of July 29, 2024 Trial (Dkt. 204) (“Trial Tr.”) 196-97.
110
See Osborn, 991 A.2d at 1159.
25
the Business Combination.”111 ARC does not challenge DWAC’s exclusion of
shares of Class A Common Stock paid to the pre-closing equity holders of TMTG.112
They dispute whether DWAC should have excluded approximately 8,369,509 shares
issued to former TMGC Convertible Noteholders at closing.113
The Charter does not define “seller.” The word is commonly understood to
mean “[o]ne who sells anything; the party who transfers property in the contract of
sale.”114 It is the “correlative [of] ‘buyer’ or ‘purchaser.’”115 Applying this
definition, TMTG equity holders who received consideration for their shares in the
business combination are “sellers.”116
111
Charter § 4.3(b)(ii).
112
See Pl.’s Opening Br. 43.
113
The total number of shares corresponding to this input is also in dispute. The Proxy
Statement stated that “up to 8,369,509 shares” were issuable upon conversion of the TMTG
Convertible Notes, and ARC uses this number. Proxy Statement at 236; Pl.’s Opening Br.
29. DWAC avers that the correct number is the “final tally” of shares issued (7,854,534)
rather than the maximum issuable according to the Proxy Statement. Defs.’ Answering Br.
65. Since I decline to include these shares in the numerator, I need not resolve which value
is correct.
114
Seller, Black’s Law Dictionary (10th ed. 2014).
115
Id.
116
ARC concedes that “sellers” is unambiguous; I agree. Nevertheless, ARC relies on
extrinsic evidence to argue that the defendants never considered TMTG creditors to be
sellers. See Pl.’s Opening Br. 46-47. This evidence has no bearing on the plain text of the
Charter. For example, the fact that the “Seller Representative” discussed in the Merger
Agreement does not represent former holders of TMTG Convertible Notes does not mean
that those former noteholders were not sellers at closing under the Charter. See Pl.’s
Opening Br. 45-46 (citing JX 86 at 5).
26
ARC asserts that that the holders of TMTG Convertible Notes were creditors
of TMTG—not sellers.117 By their terms, however, the TMTG Convertible Notes
“automatically converted” into TMTG shares “immediately prior to the closing” of
the business combination.118 The Merger Agreement confirms that the TMTG
Convertible Notes would “automatically convert immediately prior to the Effective
Time into a number of shares of [TMTG] Common Stock.”119
ARC insists that this conversion was an “accounting mechanic.”120 Perhaps.
But the TMTG Convertible Noteholders were nevertheless TMTG equity holders
immediately before closing.121 The contemporaneous transaction documents
confirm this transactional reality. The transfer agent was directed to “[i]ssue an
aggregate of 94,739,894 shares of New Digital World common stock” for all private
117
Pl.’s Opening Br. 43.
118
JX 318.
119
JX 86 at ‘796; see also JX 137 (“[P]rior to the Effective Time, the issued and outstanding
TMTG Convertible Notes will be converted into shares of TMTG common stock.”). The
Merger Agreement defines “Effective Time” as the time at which “[t]he [p]arties . . . shall
cause the Merger to be consummated by filing the Certificate of Merger for the merger of
[the DWAC merger subsidiary] with and into [TMTG] . . . with the Secretary of State of
the State of Delaware in accordance with the relevant provisions of the DGCL.” JX 9
§ 1.2.
120
Pl.’s Opening Br. 45.
121
Cf. Salladay v. Lev, 2020 WL 954032, at *15 & n.172 (Del. Ch. Feb. 27, 2020)
(discussing that the “ownership stake at the effective time” of the merger included “[n]otes
[that] would automatically convert into shares of [the company’s] common stock
immediately prior to the consummation of the [t]ransaction”).
27
TMTG stockholders—including the former TMTG Convertible Noteholders.122
Because the TMTG Convertible Notes were converted into TMTG stock before the
business combination closed, the creditors became equity holders after the initiation
of the closing process but before the business combination occurred. They were
therefore “sellers” in the business combination under Section 4.3(b)(ii) of the
Charter and properly excluded from the numerator of the Conversion Ratio.
3. ARC Notes
The second category of securities that could be excluded from the Conversion
Ratio under Section 4.3(b)(ii) of the Charter is “any private placement units (or
underlying securities) issued to [ARC] or its affiliates upon conversion of loans
122
JX 329 at 2. The instructions to the transfer agent noted that a list of persons to whom
the shares would be issued and the amounts issued per person were included in “Annex
D.” Id. But Annex D was not included with the version of the letter produced by the
transfer agent. Id. at 13 (“See attached Excel.”). The defendants produced a spreadsheet
of Annex D after ARC had filed its pretrial reply brief. ARC moved to exclude that
document because the spreadsheet was produced after the close of fact discovery and
sought an adverse inference. Dkt. 184; see also Dkt. 190. I decline to exclude the
document. ARC first raised its theory that the TMTG Convertible Noteholders were not
“sellers” after discovery closed. It was on notice of the existence of Annex D for months,
after receiving the letter referencing it in a production from the transfer agent. And it
carries the burden of proof. See e.g., Oberly v. Howard Hughes Medical Inst., 472 A.2d
366, 387 (Del. Ch. 1984) (stating that where the “nonexistence of a fact” was required to
prevail, the “burden of proof as to a negative proposition also rests upon the party asserting
it”); 29 Am. Jur. 2d Evidence § 173, Westlaw (database updated Aug. 2024) (“[W]hoever
asserts a claim . . . that . . . depends upon a negative proposition has the burden of
establishing the truth of the assertion[.]”). Even without Annex D, I would conclude that
the TMTG Convertible Noteholders were “sellers” under Section 4.3(b)(ii).
28
made to [DWAC].”123 Although the Charter does not define “private placement,”
the generally accepted meaning of this term is a sale of securities to select investors
through an unregistered private offering.124
DWAC invoked this exception in connection with the ARC Notes, which
were promissory notes memorializing loans from ARC to DWAC. DWAC excluded
from the Conversion Ratio 446,355 shares of Class A Common Stock that were
issued to ARC upon the conversion of the ARC Notes.125 ARC obtained the ARC
Notes through a private offering.126 The unpaid principal amount of the ARC Notes
was convertible into “Conversion Units” equal to one share of Class A Common
Stock and one-half of one warrant to purchase one share of Class A Common
Stock.127
123
Charter § 4.3(b)(ii).
124
See, e.g., Office of the Comptroller of the Currency, Comptroller’s Handbook (Section
411) Narrative and Procedures: Private Placements 1 (1990); see generally In re
MultiPlan Corp. S’holders Litig., 268 A.3d 784, 794 (Del. Ch. 2022) (discussing a private
placement to a SPAC sponsor).
125
ARC disputes whether DWAC shorted it 45,000 shares when converting the ARC
Notes. See Pl.’s Opening Br. 42 & n.15. ARC has agreed, however, to seek a finding that
446,355 shares of Class A Common Stock should have been included in the numerator. It
reserves the right to resolve the potential discrepancy at a later time.
126
See Trial Tr. at 102-03 (“It is a type of private placement and a unit is derived from it.”).
127
JX 22 at 12; JX 21 § 15(a); JX 30 § 16(a); JX 31 § 16(a).
29
A plain reading of the Charter supports DWAC’s exclusion of the shares
derived from the ARC Notes. So does the purpose of the Conversion Ratio. ARC’s
interest was not diluted by shares issued to ARC.
Yet ARC insists that the ARC Notes cannot be classified as a “private
placement.” It draws a distinction between private placement units ARC purchased
in conjunction with the IPO (which it believes should be excluded from the
Conversion Ratio) and subsequent private placement convertible note issuances
(such as the ARC Notes).128 ARC relies on the fact that the securities associated
with the ARC Notes were defined as “Conversion Units” and not “private placement
units.”129 But the nomenclature assigned to the units does not change the fact that
they were obtained by ARC through a private placement. The loan documents
confirm that the “Conversion Units” were “identical to units issued . . . in the private
placement that closed contemporaneously with” DWAC’s IPO.130
The text of Section 4.3(b)(ii) of the Charter further belies ARC’s distinction.
The initial private placement at the IPO involved a purchase of units by ARC. The
Charter, however, addresses “private placement units issued to [ARC] upon
128
Pl.’s Opening Br. 40-41; see also Trial Tr. 101-02.
129
JX 21 § 15(a); JX 30 § 16(a); JX 31 § 16(a).
130
JX 30 § 16(a); JX 31 § 16(a); see also JX 21 § 15(a) (“The Conversion Units shall be
identical to the units issued . . . in a private placement upon consummation of the IPO.”).
30
conversion of loans to [DWAC].”131 ARC’s attempt to restrict the Conversion Ratio
exception to initial private placement units purchased by ARC would leave the
phrase “upon conversion of loans” meaningless.
4. Inclusion of “Missing” Shares
Finally, ARC asserts that DWAC improperly excluded 524,594 shares of
Class A Common Stock from the Conversion Ratio. ARC is suspicious of 35
“Selling Securityholders” listed on DWAC’s April 15, 2024 Registration Statement
who collectively obtained these shares.132 Though ARC questions how these
individuals received unregistered Class A shares, it avers that if the shares were
issued, they must be reflected in the numerator.133
The Conversion Ratio calculated by DWAC already accounts for these shares.
The Registration Statement lists all individuals who received TMTG shares through
resale transactions.134 These “Other Securityholders” together held 1,627,700 shares
as of the filing of the Registration Statement.135 A total of 4,600 shares belonging
to two stockholders were mistakenly excluded from this list in the Registration
131
Charter § 4.3(b)(ii) (emphasis added).
132
Pl.’s Opening Br. 29-31; see JX 137 at 129, 130-32.
133
Pl.’s Opening Br. 31.
134
JX 137 at 130-34. DWAC explained that noteholders who received shares upon the
business combination passed them on to other parties. See Trial Tr. 258-59.
135
See JX 137 at 130-32 (under “Other Securityholders” heading).
31
Statement.136 With these shares, the “Other Securityholders” received 1,632,300
shares.137
Although these 4,600 shares were not reflected in the original Registration
Statement, the shares were included in the numerator of the Conversion Ratio. The
records of DWAC’s transfer agent address 1,632,300 shares.138 DWAC’s
calculation of the Conversion Ratio accounts for 1,632,299 shares.139
There is a discrepancy of a single share, which DWAC attributes to a rounding
error.140 Apart from that share, ARC failed to prove that DWAC omitted these shares
when calculating the Conversion Ratio. To require DWAC to include them again,
as ARC requests, would lead to double counting.
* * *
ARC prevails, in part, on its breach of contract claim. The correct Conversion
Ratio is 1.4911:1. This Conversion Ratio reflects the inclusion of shares issued or
issuable in respect of the Alternative Warrants, Legal Services Note, and
136
Compare JX 137 at 130 (listing 10,866 shares for David Jimmerson and 3,334 shares
for Luis Enrique Cruz), with Trump Media & Technology Group Corp., Am. No. 3 to Form
S-1 (filed with the SEC June 17, 2024) at 125 (listing 14,633 shares for David Jimmerson
and 4,167 shares for Luis Enrique Cruz).
137
1,627,700 + 3,767 + 833 = 1,632,300 shares.
138
JX 330.
139
See JX 130 at 18-20.
140
See Defs.’ Answering Br. 66.
32
B. Breach of Fiduciary Duty
“A claim for breach of fiduciary duty requires proof of two elements: (1) that
a fiduciary duty existed and (2) that the defendant breached that duty.”145 The
Director Defendants owed fiduciary duties to all DWAC stockholders, including
ARC. ARC claims that the Director Defendants breached those fiduciary duties in
two ways: by calculating the Conversion Ratio in bad faith and by issuing false and
misleading disclosures about the Conversion Ratio.146 Neither theory succeeds.
1. Calculation of the Conversion Ratio
ARC claims that the Director Defendants breached their fiduciary duties by
deliberately advancing an erroneous Conversion Ratio.147 According to ARC, the
Director Defendants were motivated to miscalculate the Conversion Ratio out of
“personal animus” toward Orlando.148 ARC cites to evidence of Orlando being
excluded from DWAC Board meetings about the Conversion Ratio and claims of
privilege by the defendants in this litigation as reflecting bad faith.149
145
Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010) (citation omitted), aff’d
sub nom. ASDI, Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010).
146
See PTO ¶¶ 37, 40; see also Compl. ¶¶ 63-64.
147
See PTO ¶ 40.
148
Compl. ¶ 51.
149
See Pl.’s Opening Br. 18 n.5.
34
ARC’s fiduciary duty claim concerns a contractual right affecting DWAC’s
Class B stockholders—not a fiduciary duty owed to all DWAC stockholders. ARC
complains that the Director Defendants harmed Class B stockholders by
miscalculating the Conversion Ratio. This is the same harm complained of in ARC’s
breach of contract claim, in which ARC alleges that the defendants contravened the
Charter.150 ARC “may not ‘bootstrap’ a breach of fiduciary duty claim into a breach
of contract claim merely by restating the breach of contract claim as a breach of
fiduciary duty.”151
Above, I concluded that ARC prevailed in part on its breach of contract claim.
DWAC misapplied certain figures in calculating the numerator of the Conversion
Ratio. ARC is entitled to a remedy to compensate it for that breach. But it cannot
also recover for its superfluous breach of fiduciary duty claim.152
150
Cf. MultiPlan, 268 A.3d at 806 (concluding that a fiduciary duty claim was separate
from a contract claim, where the right at issue was provided in accordance with the
certificate of incorporation but the defendants disloyally frustrated it).
151
Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009); see also Nemec v.
Shrader, 991 A.2d 1120, 1129 (Del. 2010) (“It is a well-settled principle that where a
dispute arises from obligations that are expressly addressed by contract . . . any fiduciary
claims arising out of the same facts that underlie the contract obligations [will] be
foreclosed as superfluous.”).
152
See Grayson v. Imagination Station, Inc., 2010 WL 3221951, at *8 (Del. Ch. Aug. 16,
2010) (explaining that in assessing whether there is an independent basis for a fiduciary
duty claim involving contractual rights, the court will consider whether the fiduciary duty
claims “depend[] on additional facts, [are] broader in scope, and involve[] different
potential remedies”).
35
2. Disclosures About the Conversion Ratio
ARC also claims that the Director Defendants breached their fiduciary duties
by seeking stockholder approval of the business combination and a Charter
amendment on the basis of a materially false and misleading Proxy Statement.153 It
raises three alleged issues with the Proxy Statement disclosures:154 (1) misstating
that DWAC’s Board had discretion in setting the Conversion Ratio and that a lower
Conversion Ratio could be applicable;155 (2) misstating that working capital loans
provided by ARC did not trigger the anti-dilution provision in the Charter;156 and
(3) omitting that the second amendment to the Merger Agreement was meant to
ensure that TMTG Convertible Notes were dilutive to Class B stockholders.157
153
PTO ¶ 37.
154
See Pl.s’ Opening Br. 49-50.
155
Proxy Statement at 109 (disclosing that “when calculating the definitive conversion
ratio, the Board may also decide to exclude any Post-IPO Financings” and “[a]s a result,
the Board may find a different, lower conversion ratio to be acceptable at the time of the
Closing”); see also id. (“Class B common stock may disagree with the conversion ratio,
particularly if the Board decides that other Post-IPO Financings should also be excluded
resulting in a lower conversion ratio and therefore a lower number of shares of New Digital
World common stock upon conversion of the Class B common stock.”).
156
Id. at 108 (“Our Charter provides for an adjustment mechanism to the conversion ratio
applicable to Class B common stock to the extent that additional shares of Class A common
stock or equity-linked securities are issued in connection with the closing of an initial
business combination. As such, unlike working capital loans provided by our Sponsor,
Post-IPO Financings with third parties other than the Sponsor, trigger the anti-dilution
provision contained in our Charter, adjusting the conversion ratio of our Class B common
stock to Class A common stock for the benefit of holders of our Class B common stock.”).
157
Id. at 204-05.
36
“Delaware law imposes upon a board of directors the fiduciary duty to
disclose fully and fairly all material facts within its control that would have a
significant effect upon a stockholder vote.”158 Information is material if “there is a
substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote.”159 None of the challenged disclosures meet this test.
First, I cannot conclude that the descriptions of the Conversion Ratio in the
Proxy Statement were materially false or misleading. This litigation demonstrates
that the Conversion Ratio is complicated in application. ARC itself has changed its
preferred calculation approach multiple times. The Director Defendants accurately
communicated in the Proxy Statement that they were tasked with calculating the
Conversion Ratio and that a decision on the calculation would be forthcoming.160
The Proxy Statement cautioned stockholders that DWAC “c[ould ]not provide
assurances regarding its ability to defend its position on the anti-dilution
provision.”161
158
Stroud v. Grace, 606 A.2d 75, 85 (Del. 1992).
159
Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018) (quoting Rosenblatt v. Getty Oil Co.,
493 A.2d 929, 944 (Del. 1985)).
160
Proxy Statement at 96-97 (stating that DWAC “expect[ed] the conversion ratio rate to
be 1.34,” that the “Board may [] decide to exclude” certain financings from the Conversion
Ratio and “may find a different, lower conversion ratio to be acceptable at the time of the
Closing,” and that “there is no assurance that the current conversion ratio will not
materially differ at the time of the Closing”).
161
Id.37
The disclosures about the ARC Notes were also accurate. DWAC properly
disclosed that “unlike working capital loans provide by our Sponsor, Post-IPO
Financings with third parties other than the Sponsor[] trigger the anti-dilution
provision contained in our Charter.”162
Nor can I conclude that the disclosures about the second amendment to the
Merger Agreement were materially false or misleading. The Proxy Statement
discloses that, under the amendment, TMTG Convertible Noteholders would
become TMTG stockholders immediately before the business combination.163 This
is not misleading. The Proxy Statement described the conversion consistent with
the terms of the notes.164 There is no evidence that the Director Defendants entered
into the second amendment to the Merger Agreement (which Orlando signed) with
the intent to dilute Class B stockholders.
Further, there is no basis to conclude that these alleged misstatements would
have been important to DWAC stockholders in deciding how to vote. Voting
stockholders would have wanted to understand the Conversion Ratio calculation
insofar as it affected their transaction consideration.165 But it is hard to imagine that
162
Id. at 96; see also Section II.A.3.
163
Proxy Statement at 224.
164
See supra Section II.A.2.
165
Cf. Gilmartin v. Adobe Res. Corp., 1992 WL 71510, at *10 (Del. Ch. Apr. 6, 1992) (“[I]t
is axiomatic that [information concerning] the fairness of the consideration offered . . . is
material.”).
38
they would have been focused on the extent of the Board’s discretion performing the
calculation. Stockholders were also entitled to—and could—understand the terms
of the second amendment to the Merger Agreement, rather than ARC’s disproven
suspicions about the impetus of the amendment. Nothing in the record indicates that
the Director Defendants intentionally misrepresented the Conversion Ratio or the
second amendment to the Merger Agreement.166
C. Affirmative Defenses
The defendants put forth seven affirmative defenses. Two defenses—for
failure to state a claim and the application of an exculpatory Charter provision—
were presented in the answer to ARC’s original pleading.167 Neither defense affects
the determinations made above.
After ARC was permitted to amend its complaint to add revised allegations
slightly changing its calculation of the Conversion Ratio and about its personal
animus theory, the defendants raised five new affirmative defenses.168 These
defenses are: (1) estoppel; (2) unclean hands; (3) laches; (4) in pari delicto; and (5)
166
E.g., Swider Dep. 46-48.
167
Dkt. 32 at 20-21.
168
See Dkts. 91, 108.
39
the parol evidence rule.169 ARC filed motions to exclude these affirmative defenses
as untimely and baseless.170
Court of Chancery Rule 8(c) provides that “[i]n responding to a pleading, a
party must affirmatively state any avoidance or affirmative defense,
including . . . estoppel.”171 Affirmative defenses not timely pleaded are waived.172
But the new defenses are not unique to ARC’s amended allegations and theories.
They could have been raised in response to ARC’s initial complaint.
The amended complaint afforded the defendants an opportunity to assert new
affirmative defenses as to the newly pleaded matters.173 It did not create an
opportunity for a do-over to raise defenses that could have been brought months
earlier. Since the affirmative defenses were not linked to the two matters first raised
in the amended complaint, they were waived.174
169
Dkt. 108 at 27-28.
170
Dkts. 147, 155, 168; see also Dkts. 77, 156, 169.
171
Ct. Ch. R. 8(c)(1).
172
E.g., In re Tr. FBO duPont Under Tr. Agreement Dated August 4, 1936, 2018 WL
4610766, at *11 (Del. Ch. Sept. 25, 2018) (“[A]ffirmative defenses that are not plead are
waived.”).
173
Ct. Ch. R. 12(h)(6) (“If a pleading raises new matter that is subject to a defense listed
in Rule 12(b)(2)-(6), then an opposing party may assert that defense—even if not asserted
or preserved initially—as to the new matter.”).
174
See Deene v. Peterman, 2007 WL 2162570, at *7 (Del. Ch. July 12, 2007) (explaining
that any defense not raised initially is deemed waived).
40
The estoppel affirmative defense is perhaps the most obvious case of
waiver.175 The defendants allege that ARC communicated positions to them about
the Conversion Ratio on which they purportedly relied to their detriment in making
public disclosures.176 Although ARC’s original complaint alleged that the
Conversion Ratio was higher than disclosed in the Proxy Statement, the defendants’
answer to that pleading lacked an estoppel affirmative defense.177 Instead, the
defendants attempted to present an estoppel defense in a draft pre-trial order on
March 27—before ARC moved to amend its complaint.178
The defendants’ affirmative defenses are not only late but also weak. To
prevail on an estoppel theory, a party must show that it: “(i) lacked knowledge or the
means of obtaining knowledge of the truth of the facts in question; (ii) reasonably
relied on the conduct of the party against whom estoppel is claimed; and (iii) suffered
a prejudicial change of position as a result of [its] reliance.”179 How DWAC and the
Director Defendants lacked knowledge of the facts needed to calculate the
175
Cf. Abdi v. NVR, Inc., 945 A.2d 1167 (Del. 2008) (TABLE) (holding that the failure to
plead an affirmative defense in the answer to a complaint constitutes a waiver of the right
to assert that defense).
176
Dkt. 108 at 27.
177
Dkt. 1 ¶ 41; Dkt. 32 at 20-21.
178
Dkt. 147 Ex. E ¶ 45.
179
HC Cos. v. Myers Indus., Inc., 2017 WL 6016573, at *7 (Del. Ch. Dec. 5, 2017) (citation
omitted).
41
Conversion Ratio or reasonably relied on the views of Orlando and ARC alone is
unapparent.
The other affirmative defenses fare no better. The defendants’ unclean hands
theory fails because it concerns purported breaches of fiduciary duty by Orlando as
ARC’s managing member, which are unrelated to ARC’s claims here about the
Conversion Ratio.180 The in pari delicto theory fails for similar reasons since
allegations of breaches of fiduciary duty and illegal conduct by Orlando have no
bearing on the calculation of the Conversion Ratio.181 The defendants’ laches
defense concerns the timing of ARC’s amended complaint, which I previously
resolved in ruling on ARC’s motion to amend.182 And the “parol evidence”
affirmative defense is instead an evidentiary argument.183
180
Dkt. 108 at 27; Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 80-81 (Del. Ch. 2008)
(explaining that the equitable doctrine of unclean hands “provides that ‘a litigant who
engages in reprehensible conduct in relation to the matter in controversy . . . forfeits his
right to have the court hear his claim’” (quoting Nakahara v. NS 1991 Am. Tr., 739 A.2d
770, 791-92 (Del. Ch. 1998))).
181
See In re LJM2 Co-Inv., L.P., 866 A.2d 762, 775-76 (Del. Ch. 2004). The doctrine of
in pari delicto bars a party’s recovery where it is equally at fault. It is based on the
“principle of public policy” that “[n]o Court will lend its aid to a man who founds his cause
of action upon an immoral or an illegal act.” See Am. Healthcare Admin. Servs., Inc. v.
Aizen, 285 A.3d 461, 487-88 (Del. Ch. 2022) (citing 1 Cowp. 341, 98 Eng. Rep. 1120
(KB)).
182
Dkt. 108 at 27; Dkt. 86.
183
Dkt. 108 at 28 (alleging that the court should not consider parol evidence since the
Charter is unambiguous). The defendants also filed a motion in limine to exclude extrinsic
evidence. Dkt. 152. This motion was resolved above in connection with the analysis of
ARC’s breach of contract claim. See supra Section II.A; see also supra note 116.
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III. CONCLUSION
For the reasons stated above, ARC has prevailed in part on its claim that
DWAC breached Section 4.3 of the Charter by excluding certain securities from its
calculation of the Conversion Ratio. ARC is entitled to an order specifically
enforcing Section 4.3 of the Charter based on the correct Conversion Ratio of
1.4911:1 and to related declaratory relief.
ARC has failed to prove its breach of fiduciary duty claims.
The defendants’ affirmative defenses are excluded as untimely and are
otherwise deficient.
Given the looming expiration of the lockup, an implementing order has been
filed contemporaneously with this memorandum opinion. The parties are to inform
the court of any remaining matters to be addressed, as detailed in that order.
43